Stimulus will only work if capital invests in Fourth Industrial Revolution platforms

President Cyril Ramaphosa has called the South African Investment Conference for October 25-27, 2018. The investment conference will hopefully attract solid investments into the South African economy.

With the low GDP growth of our economy, we need investments to fulfill the social mandate of the ruling party and government, to the majority of South African citizens.

South Africa’s high unemployment rate makes it imperative that we attract investment that should also result in further initiatives to reduce unemployment and inequality.

In China, investment under Deng Xiaoping after 1987 led to economic growth and almost 600 million people out of poverty.

More importantly, China has emerged as an industrialised economy and moved from a low-income country to a middle-income country.

What has perhaps not been noticed is that China is now on a par with the US in terms of the 4IR and platform initiatives or companies.

Many experts on the 4IR argue that China is on the verge of surpassing the US in the areas of Artificial Intelligence and Robotics.

South Africa has a young population and the South African economy is increasingly digitalised. Disruption is occurring at every level in the South African economy, whether it is in the banking sector, retail, media or even in the large-scale mining and industrial economies.

Globally, platform companies dominate economies. Recently, Amazon in the US, became the world’s first platform company to move past the one-trillion-dollar market capitalisation mark, along with Apple, which is a device company using platforms. Similarly, Uber, Netflix, PDD, Lyft, Flipkart, ByteDance and many other platform companies, whose combined market capitalisations exceed a few hundred billion dollars and whose losses run into tens of billions of dollars.

The platform economy dominates most modern economies and, increasingly capital flows to these companies, with the world’s top five platform companies having market caps of trillions of dollars.

In SA, the majority are youth, and most of them utilise online technologies such as mobile devices and all of them use these platform companies.

However, South African capital markets, and especially companies listed on the JSE, have failed to invest in platform companies. Asset managers and investors have failed to invest in either listed or unlisted companies, with the exception of Naspers, whose value is largely determined by its investment in Chinese company Tencent.

If the President is to achieve his objectives of meaningful economic growth and job creation, with a focus on skilling up young people in the digital economy, he needs to ensure that the investment conference encourages investment into platform companies. This requires a leap of faith from the South African investment community and courage to allow for loss-making companies to build platforms for the next few years.

South Africa’s private sector is used to investing in mining and, retail, since this has been the mainstay of the economy for decades and certainly a legacy of the past. To attract real investment, employment and economic growth, capital must invest in the digital platform economy.

The dilemma that capital faces is that platform economies are loss-making, sometimes for decades. If one looks at the examples of Amazon, Uber and Netflix, Amazon did not make a profit for almost 15 years in its core B2C business. Uber to date has lost $11 billion (R156.77bn) and Netflix is reported to have lost $2bn, yet their combined market caps exceed a trillion dollars.

Similarly, Chinese companies such as Didi Chuxing, ByteDance, PDD whose combined losses exceed billions of dollars and would be regarded as start-ups, now have market valuations of more than a hundred billion dollars.

Asset managers and analysts in SA are not used to these platform economic models.

Instead, they would look at figures such as NAV, PAT and cash flows. One would argue that their mindset is low risk and almost exclusively, (apart from Naspers) directed towards old economy investments.

Earlier this year, several Harvard professors published an article in Harvard Business Review on why current accounting standards are no longer applicable to platform economies.

South African asset managers will happily tell you that they have invested in their international portfolios in Facebook, Google or Amazon, but have failed to invest in platform companies operating in SA and the African continent.

The result is that SA will lose out, in that all these global platform companies will expatriate profits, pay minimal tax and not invest in skills or jobs for South Africans.

If South African companies will not invest in our own technology and skills base, which is necessary for job opportunities, especially for young people, we will be digitally and economically colonised and become subjects of global platform giants such as Facebook, Google, Amazon, Snap, Instagram, etc.

The irony is that while freedom from colonisation led to independence of many African countries, we have replaced country colonisation with virtual colonisation, which makes a mockery of economic freedom, data privacy and decision making of people in these countries.

If we are to address meaningful economic growth and employment, President Ramaphosa should insist that South African capital markets that are sitting with a trillion rand on their balance sheets invest at least 20percent of this in platform and digital economies.

This would ensure that we participate in the new economy, not only as the subjects of the new economy, but as owners of the new economy, able to create employment for our young people and additional revenue for our fiscus.

Whilst investment into the industrial economy is essential and a foundation of all industrial revolutions, it remains only one element of economic growth and success.

It is a tragedy that Softbank, the world’s largest private equity fund and technology company, has to date invested more than $70bn in 2 years in global start-ups, none of which has been invested in SA or Africa, and virtually all of it has been invested in China, the US and India.